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U.S. Federal Reserve Chairman Ben Bernanke listens to opening remarks prior to delivering his semi-annual monetary policy report to Congress before the House Financial Services Committee in Washington, July 17, 2013. (JONATHAN ERNST/REUTERS)
U.S. Federal Reserve Chairman Ben Bernanke listens to opening remarks prior to delivering his semi-annual monetary policy report to Congress before the House Financial Services Committee in Washington, July 17, 2013. (JONATHAN ERNST/REUTERS)

Don Coxe: Fed bond tapering is a time for investors to rejoice Add to ...

2. Capitalism is the system that has produced most of the economic growth in the world for the past two centuries. According to Niall Ferguson, in 1978 when Deng Xiaoping became impressed with how the working class benefited from capitalism, the average American was 22 times as rich as the average Chinese; today the ratio is five to one. That is the most astonishing large-scale growth in wealth in the history of the world, and it was achieved because Deng and his followers embraced capitalism and abandoned Marxist-Leninist economic formulas. India, Indonesia, Vietnam, Chile and Colombia have had similar transformations. Even Russia under Putin has embraced a form of state capitalism under KGB auspices. (Tragically, the new governments that replaced the old dictatorships in the Arab Spring have not embraced capitalism and pluralism, but have accepted the doctrine that “Islam is the answer.” That principle of piety was framed to show a believer how to lead a virtuous life leading to an eternity in Heaven, and not to explain how to create opportunities and economic progress in the competitive global economy of here and now.)

3. As long as the monetary heroin was enriching the very rich and not stimulating risk-taking and long-term investment, the booming stock market–particularly the S&P 500–was not engaged in a virtuous interaction with the economy to permit sustained rising earnings forecasts based on sustained, visible economic growth.

4. Contrast that rally with the Reagan Rally and the subsequent stock market booms which came when interest rates on Treasuries fell from 15.7 per cent in a three-decade-long bull market that not only enticed investors to invest for growth, but supplied the equity capital for growth. A bond rally that lasts so long and drives rates down to all-time lows is ultimately gripped by greed in a new form: income – not growth. Immediate pleasure from one’s treasure rather than deferred growth of wealth through compounding. That attitudinal shift is a challenge to capitalism.

We welcome the return to risk in the stock market and we welcome China’s determined – and drastic – assault on the dark corners of its unbridled experiment in capitalism. The spectacle of the creation of vast numbers of nouveaux-riches from speculation and bribes in a supposedly egalitarian and communitarian society was a serious challenge to the continuation of the China Miracle.

The Roman Empire dominated most of the known world in its time as long as its system of a citizen army and the virtuous leadership of Augustus and his successors bore resemblance to how Rome thereafter actually functioned. It could not long survive Nero and Caligula.

We are long-term investors with a special interest in companies that produce what a growing global economy absolutely needs–food, fuels, and metals. Our companies came through the crash without resort to bailouts or handouts or cashouts. They are among the purest exemplars of capitalism as it was conceived, as it evolved, and as it triumphed. Naturally, they are being recommended by almost no Wall Street houses, whose swollen balance sheets with non-market-priced assets are financed with near-zero-cost liabilities.

We look forward to a return to the systematic pricing of risks and rewards. Getting from here to there will be painful after such sustained ingestion of heroin, but the sooner that process begins, the better it will be for economic growth, workers, savers, pension funds–and equity investors. (Already, according to Mercer, the funding levels of major U.S. corporate pension funds have benefited dramatically from the panicky leap in long-term yields.)

If, as we believe, capitalism will survive the heroin era, then its most conspicuous exemplars should find the later years of this decade to be an era of true growth and rewarding returns.

[1] The Great Degeneration: How Institutions Decay and Economies Die: Niall Ferguson, Penguin Press HC, June 13, 2013 [2] Mr. Coxe leads the Global Commodity Strategy investment management team – a collaboration of Coxe Advisors and BMO Global Asset Management – to create and market commodity-oriented solutions for investors. He is advisor to the Coxe Commodity Strategy Fund and the Coxe Global Agribusiness Income Fund in Canada, and the Virtus Global Commodity Stock fund in the US, and the UCIT Global Commodities Fund, as well as accounts for clients of BMO Global Asset Management.

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